Thanks to a recent report from the General Accountability Office (GAO) urging the IRS to crack down even harder, this effort will likely soon expand. U.S. citizens or permanent residents with unreported offshore accounts face an increasingly high likelihood of discovery.

By way of background, a U.S. law with the misleading name of the “Bank Secrecy Act” requires all U.S. citizens—no matter where they reside—to report all foreign “bank, securities, or ‘other’ financial accounts” with an aggregate value exceeding $10,000. All U.S. permanent residents (green card holders) must also abide by the same requirements, even those not currently residing in the United States.

You make this report on Form TD F 90-22.1 (the “foreign bank account reporting” or “FBAR” form). Reporting is required even if the accounts contain only precious metals or other non-cash assets, or generate no income. The deadline for filing is June 30 for foreign accounts held the previous year. While this requirement has existed since 1970, only in recent years has the IRS started to enforce it vigorously.

The penalties for non-compliance with the reporting regime can be draconian. You can be fined $10,000 per unreported account for each year you neglect to file the FBAR, although the sanction for a “negligent violation” is only a $500 fine. The IRS may decline to impose a civil penalty if there was reasonable cause for the delay and you later reported the account. An exception may also apply you properly reported all income from the account(s) on your income tax returns.

If you “willfully” fail to file the form, you face a fine up to $500,000, loss of 50% of the value of the highest aggregate value of the accounts, and imprisonment up to five years. This may be easier to prove than you might think. A 2012 federal appeals court concluded that a U.S. person with an unacknowledged offshore account could be found to have willfully failed to declare that account merely by signing a U.S. tax return.

The IRS has long believed that hundreds of thousands and perhaps millions of Americans fail to file FBAR forms. Beginning in 2001, it carried out a series of initiatives to pressure U.S. offshore account holders into reporting these relationships. Simultaneously, it also sought to force offshore banks to disclose financial relationships with U.S. account-holders. For instance, in 2009, Swiss banking giant UBS AG agreed to pay a $780 million fine and turn over account details on thousands of U.S. depositors suspected of holding undeclared assets to the IRS.

At the same time, the IRS held out a “carrot,” if you will, in the form of a series of initiatives that offered reduced penalties and no jail time to U.S. taxpayers who voluntarily disclosed previously unreported offshore accounts. More than 39,000 taxpayers have participated in four such “voluntary disclosure” programs beginning in 2003, and paid more than $5.5 billion to the IRS for the privilege of not facing criminal penalties.

However, a much larger number of what the IRS calls “recalcitrant” account-holders chose another route. Instead of entering a voluntary disclosure program, they simply started reporting their foreign accounts, without paying penalties or interest. Such taxpayers avoid paying any delinquent taxes, interest, or penalties, unless audited. The IRS calls this practice “quiet disclosure.”

Evidence of an explosion in quiet disclosures comes from the fact the number of people filing FBAR forms nearly doubled from 281,000 in 2007 to 516,000 in 2010.  The GAO believes that the IRS may be missing efforts by these taxpayers attempting to circumvent paying the taxes, interest and penalties that would otherwise be owed. The agency has urged the IRS to examine closely these first-time filers for disclosure violations in earlier years. And, the IRS has promised to do just that. You can download the report here.

If you’re in this situation—or if you haven’t made any attempt to comply with these rules—consult with a qualified tax attorney (not an accountant). This arrangement provides attorney-client privilege for your discussions. The tax attorney can then retain an accountant to prepare the necessary returns, and decide whether you should participate in the latest voluntary disclosure initiative.

Copyright © 2013 by Mark Nestmann

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To complicate matters further, the U.K. has suffered from a “brain drain” in recent years, due to tax hikes on high-earners. Many bankers and hedge fund managers formerly living in London have taken up residence in Switzerland, Singapore, and Hong Kong, all countries with significantly lower taxes on high-earners than the U.K.

In response, U.K. immigration authorities have streamlined the rules to favor investors, postgraduates, and highly-skilled workers under a priority ”Tier 1” category in an effort to boost migration to the U.K. and by extension the U.K. economy. The U.K. is pitching for the brightest and best, and the richest, and there are surprising shortcuts to permanent residence for those able to invest sufficient funds. Under Tier 1, a points-based system that includes “graduate entrepreneur” and “exceptional talent” categories, there is also an “Investor” visa for “high- value migrants” which leads to permanent residence.

If you qualify, for the first seven years in which you’re resident in the U.K., you may elect taxation as a “non-domiciled resident.” This means that you pay U.K. tax on your non-U.K. income and gains only on what the Inland Revenue calls a “remittance” basis. In other words, you’ll pay tax on your foreign income and gains only to the extent to which you remit them over to, or receive them in, the U.K. After seven years of U.K. residence, you can still benefit from this system of taxation, but the rules make it much more expensive to do so.

For instance, under Tier 1, if you have £1,000.000 of your own money, or £2,000.000 in personal assets plus a loan of £1,000.000 from an authorised financial institution, and you invest the £1,000.000 in a regulated U.K. financial institution within three months of your arrival in the U.K., you can apply for permanent residence after five years of continuous residence. (This means no more than 180 days spent each year outside the U.K.)

There are significant “continuous residence” discounts under the Tier 1 (Investor) category if you have larger sums available to invest. If you’re prepared to invest £5,000.000, you can apply for permanent residence after only three years, and with £10,000.000, you’re eligible after only two years.

The funds invested must remain under your control in a U.K. financial institution during the qualifying period, but you can redeploy them thereafter—thereby theoretically providing a free pass to U.K. permanent residence status. Dependent family members also qualify for permanent residence. After five years of permanent residence, you and your family may apply for U.K. citizenship and passports.

A U.K. passport provides unparalleled freedom of movement for anyone seeking visa-free travel to European and Commonwealth countries, among many others. Any individual or company interested in a review of immigration or investment possibilities in the U.K. is welcome to contact our London office. Jonathan Chalmers, who heads up this office, is a former U.K. immigration official and is closely linked to the U.K. Visas network.

The Nestmann Group, Ltd.
100 Pall Mall
St James
London SW1Y 5NQ
Tel.: + (44) 20 7321 3771
Fax: + (44) 20 7321 3738
E-mail: london@nestmann.com

Copyright © 2013 by The Nestmann Group, Ltd.

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Customs pre-clearance isn’t a well-known concept, but it’s one you should know about.  I highly recommend this option if you’re visiting or returning to the United States from abroad, and your itinerary permits it.  It’s a much lower hassle way to clear customs than doing so in the United States.  Both U.S. and non-U.S. citizens are eligible to use this facility.

My most recent visit to the United States came in the course of a short trip to Europe, mainly visiting Switzerland and Ireland.  On my way to Europe and back, I transited the United States.  While we have direct flights between the Caribbean region and Europe (Air France, KLM, Virgin Atlantic, British Airways, Air Caribes and Caribbean Airlines all come to mind), I chose to transit the United States in order to see friends and family, as well to take advantage of some free upgrades due to my status with the airlines.  I was fortunate as I received upgrades on every flight except one, including both trans-Atlantic segments.

On my way to the United States from Ireland, I passed through U.S. Customs and Border Protection’s (C&BP ) pre-clearance facility in Dublin.   The C&BP officer swiped my (non-U.S.) passport, asked me a few basic questions, and asked me to identify my bag by a photo on another screen.  Once I did so, she clicked the “cleared” button, stamped my passport, and sent me on my way.  The entire process took no more than three minutes!

The pre-clearance concept is based on a treaty between the United States and the host country.  C&BP officials stationed in a pre-clearance country inspect passengers prior to boarding their flights to the United States to determine admissibility, accept declarations, and ‘even charge duties.   Since they’re stationed on foreign soil, the C&BP officials have very limited (if any) arrest authority and in my experience tend to be far more accommodating than customs officials at a U.S. port-of-entry.

Another benefit of pre-clearance is that it eliminates having to wait in long line-ups when you arrive in the United States.  The flight is considered a U.S. domestic flight for immigration and customs purposes.  That means when you arrive at your destination, you simply walk off the plane, pick up your luggage, and depart the airport, with no customs formalities necessary.

In my case, it worked like a charm.  Upon my arrival in the United States, I disembarked just as I would have for a domestic flight.  After a nice visit with my family, I was on another flight three days later to return to the Caribbean.

I gave up my U.S. citizenship (“expatriation”) more than a decade ago after acquiring citizenship-for-life and a second passport from the Commonwealth of Dominica.  It’s probably the best decision I ever made.  Among other benefits, I’m no longer subject to U.S. taxes on my worldwide income, and no longer have my tax dollars used to support drone attacks and what my colleague Mark Nestmann calls the “War on Everything.”

The Nestmann Group, Ltd. can assist you in every phase of acquiring a second passport from the Commonwealth of Dominica or the Federation of St. Kitts & Nevis, for a total cost beginning at around $130,000.  We can also assist in every phase of your expatriation.  To learn more about these important and potentially life-saving options, please contact info@nestmann.com.

Copyright (c) 2013 by The Nestmann Group, Ltd.

P.S. Don’t forget to tune in to my weekly radio show, “The Second Passport, Residency & Travel Hour,” at http://overseasradio.com.  The show airs every Tuesday live from 3pm-4pm EST.  You can download archives of my shows at http://overseasradio.com/2nd-passports-and-expatriation-report/.

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A few days later, we received official notification from the Financial Services Unit (FSU)–the government entity overseeing the application process–that all six of our clients passed the interview with flying colors.

We anticipate that each of our applicants interviewed last week will receive their certificates of naturalization as a citizen of Dominica in about six weeks–perhaps by early June. About a month later, they should receive their passport.

That’s a pattern we’ve seen followed throughout 2013. Three clients interviewed at the end of January received their Dominica passports almost exactly three months later.

We’re very pleased by the increased speed and efficiency we’ve seen from the FSU in recent months. At the end of 2012, we learned that the FSU would be adding staff to assist with applications for economic citizenship. Obviously, the policy has proven successful.

The total cost of economic citizenship, including all fees, in the Commonwealth of Dominica starts at around $130,000 for a single applicant. This represents the world’s least expensive option for a bona-fide “instant” citizenship and passport, with a total processing time of 6-9 months. There are less expensive alternatives offered by promoters in other countries, but all involve black or grey-market documents that may latest be revoked. Indeed, I recently learned of such back-door documents issued by Honduras that the government revoked less than one year after issuance.

That won’t happen with a passport from the Commonwealth of Dominica. A formal act of the Parliament of Dominica grants citizenship for the lifetime of the applicant under the economic citizenship programme.

Why might you want to consider a second passport from Dominica? The most important benefit is that it gives you a way to travel internationally or live outside your own country if your government confiscates or refuses to renew your primary passport,

Several circumstances exist under which authorities can cancel or confiscate your U.S. passport, or the State Department can refuse to issue or renew it:

• If a federal court has issued a warrant for your arrest
• If a federal or state court has ordered you not to leave the United States
• If another country has requested your extradition
• If you owe more than $2,500 in delinquent child support payments
• If doubts arise about the legitimacy of your birthplace or naturalization as a U.S. citizen.

Even if none of these criteria apply, the list of reasons for the United States to confiscate or non-renew your passport is increasing:

• In 2011, the State Department proposed a new “Biographical Questionnaire” that, if approved, you might have to complete to receive or renew your U.S. passport. Among numerous other intrusive questions, the State Department wanted to know “if there were any religious or institutional recoding of your birth or event occurring around the time of birth (Example: baptism, circumcision, confirmation or other religious ceremony).”

• The 2012 Highway Funding Bill eventually signed by President Obama contained a provision that would confiscate the passport of anyone with a “seriously delinquent tax debt.

Neither of these initiatives made it into law…yet. But, the handwriting is on the wall. If you’re a U.S. citizen who values the right to travel internationally, you should try to acquire a second passport, just in case.

A second passport can also expand your travel possibilities, reduce your profile to terrorists, give you the right to reside in other countries, and give you a way to cross international borders if your primary passport is lost or stolen. It also gives you a way to leave legally a country whose borders are closed due to war or civil conflict.

And finally…if you’re a U.S. citizen, you’ll need a second passport if you ever decide to “expatriate” or give up your U.S. citizenship and passport. Since the United States taxes its citizens on their worldwide income, no matter where they live, this is the only way for a U.S. citizen to eliminate U.S. tax liability on their non-U.S. income.

For over three years, The Nestmann Group, Ltd. has been an authorized agent for the Commonwealth of Dominica economic citizenship programme–the only one in the entire United States. If you’re interested in learning more about how you can acquire your own Dominica passport, please contact us at info@nestmann.com.

And, you might not want to wait much longer. The European Commission, the European Union’s executive authority, has recommended that citizens of Dominica be given visa free entry into the “Schengen group” of EU nations.

The Schengen group consists of Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland.

Dominica passport-holders already have visa-free access to Ireland and the United Kingdom. These two countries are not part of the Schengen group.

One thing is for certain: If the proposal becomes law, a Commonwealth of Dominica passport will instantly become a far more useful travel document. The Dominican government fully understands this reality. There’s a high probability that the cost for a Dominica passport will increase significantly once the country achieves visa-free access to the Schengen area.

Copyright (c) 2013 by Mark Nestmann

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In the United States, you don’t even need to be at the “border” to be subject to these rules. In 2008, the Department of Homeland Security, which oversees the U.S. Customs & Border Protection Service (CB&P), announced that it would apply these rules not just at actual border crossings, but also within 100 miles of any border crossing. That brings many of America’s largest cities, including New York, San Francisco, Las Angeles, and Miami, into what the American Civil Liberties Union calls a “constitution-free zone.” Between 2008 and 2010, 6,500 persons had their electronic devices searched along the U.S. border, according to the DHS.

Until very recently, U.S. courts have essentially rubber-stamped these policies. Even if you take the precaution of encrypting the contents of your electronic devices (highly recommended), C&BP officials may demand the password. They may even demand passwords to your e-mail accounts. Federal courts have ruled that prosecutors can even force criminal defendants to divulge their encryption passphrases so prosecutors can view their unencrypted files.

I recommend that anyone subjected to this type of search at a U.S. border (or within 100 miles of one) to give the CB&P official their electronic devices, but decline to decrypt the contents without a court order. It may be helpful to have a plausible reason why you’re taking this stand. For instance, my laptop is encrypted and not accessible without typing in a series of passphrases. While a customs official has never asked for my passphrase, if I face this question in the future, I will say something like, “I’m sorry but I can’t provide that because many of the files on this computer are subject to attorney-client privilege.”

Incidentally, the only times that a CB&P official has taken any interest in my laptop at all (twice), all they’ve done is turn it on. As soon as the passphrase dialogue came up, they turned it off and gave it back to me.

Occasionally, CB&P officials won’t detain you, but will confiscate your electronic device or devices and send them to a laboratory for a forensic analysis. The agency claims it has the right to hold them as long as it wants to uncover evidence of any kind of illegal activity. However, at least one U.S. court has declared that the government can’t detain your electronic devices indefinitely without first obtaining a warrant.

A decision in March 2013 changes this legal landscape significantly, although it only applies in the states constituting the Ninth U.S. Circuit Court of Appeals (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington). In these states, CB&P officials must have a “reasonable suspicion” of wrongdoing before searching an electronic device. Moreover, the fact that you protect your data with a password doesn’t provide such reasonable suspicion.

This is definitely a step in the right direction. CB&P officials in these states may still undertake a “manual review of files on an electronic device” without reasonable suspicion. However, absent reasonable suspicion, they cannot conduct a detailed forensic analysis of the entire device for “not-quite deleted” files, browsing records, etc.

Hopefully, other federal circuits will emulate the Ninth Circuit decision so that the policy in these states applies nationwide. But until then, if you’re entering the United States with any electronic device, try to do so in a Ninth Circuit state. You’re much less likely to be harassed into volunteering for a forensic search of your electronics than you would be in other parts of the country.

Copyright © 2013 by Mark Nestmann

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In the Middle Ages if you had gold, silver, or jewelry you didn’t want to store at home, you could take it to a secured warehouse or a goldsmith to store it. You gave the warehouse-keeper a sealed bag of coins and received a receipt for it. The warehouse-keeper didn’t lend out your valuables; he only kept them secure, in return for a fee.  As long as no one (including the warehouse-keeper) stole your valuables, your wealth was secure.  Such safekeeping arrangements remain popular today in bonded warehouses throughout the world.

Not all depositors, however, insisted on receiving the same bag of valuables back from the warehouse-keeper. They were satisfied to receive back equivalent value. Depositors could now use the receipts warehouse-keepers issued as a medium of exchange.

Warehouse-keepers understood that not every receipt would likely be redeemed simultaneously. They began lending out some fraction of the valuables stored in exchange for interest payments. In this manner, warehouse keepers and goldsmiths evolved into interest-paying fractional-reserve banks.

This strategy, of course, wasn’t (and isn’t) risk-free. The biggest risk, of course, is the “bank run.” If a bank lends out too much of the funds on reserve, and every depositor wants their money at once, the bank won’t be able to pay everyone back what they’re owed. Deposit insurance schemes evolved to shield bank customers from this reality. As a result, during the lifetime of anyone alive today, bank customers have treated their bank deposits as if they were 100% backed by actual reserves. The seemingly unlimited ability of central banks to conjure money out of thin air tended to lend credence to this assumption.

Then came Cyprus. The bailout agreement was, in effect, a “bail-in,” as it forced uninsured depositors to pay some of the costs. Those with deposits under than €100,000 suffered no loss, but uninsured depositors lost billions of euros under the agreement.

This is actually a healthy, but painful result. It’s a reminder that when you deposit money in a bank, you are turning over your property to that institution in return for a debt claim. The money is no longer your own: it belongs to the bank. You become an unsecured creditor holding an IOU.

The Cyprus bailout is also a reminder that taxpayer-funded bailouts and helicopters of fiat cash created by a central bank may not always be available to banks that take huge risks with their depositors’ money. It is good to be reminded of this risk at least once in a lifetime.

Cyprus proved the viability of the bail-in model. Indeed, over the last few weeks, I’ve confirmed bail-in plans in the following countries:

• Canada. The 2013 budget proposes to implement a “bail-in” regime for systemically important banks.
• New Zealand. The Central Bank plans to manage bank failures by putting depositors on the hook for bailing out their bank.
• Italy. Germany’s influential Commerzbank has called for a one-time 15% tax on private savings accounts to reduce Italian debt levels.
• United States & United Kingdom. Under a plan agreed to in 2012 by the Federal Deposit Insurance Commission and the Bank of England, a failed bank could by “exchange or converting a sufficient amount of the unsecured debt from the original creditors of the failed company (meaning you, the bank depositors) into equity (stock in the bank).” In other words, the FDIC could forcibly convert money you have in your bank accounts into shares in potentially worthless banks.

Some pundits claim that bail-ins could never occur in countries with strong banking systems.  I wouldn’t count on it. If banking regulators in any country deem a bail-in necessary, it will occur. This risk is the inevitable consequence of fractional reserve banking.

This new reality is harsh, but as I said before, it’s healthy. People need to be reminded that money deposited in a bank converts their wealth into a debt-claim.

How can you protect yourself? I can think of three ways to minimize your risks:

• Minimize your exposure to the banking system by keeping the bulk of your wealth in other assets. Precious metals are ideal for this purpose, especially at current depressed price levels, although prices could go considerably lower if as with Cyprus, future bailouts are conditioned on the forced sale of national gold reserves. Keep a healthy supply of cash at home, too.
• Use only strong, well-capitalized banks to hold the funds you keep in the banking system.
• Keep funds you deposit in banks off the banks’ balance sheet if you can. This means, for instance, using your deposits to purchase securities that the bank holds for you in safekeeping, off its balance sheets.

With this new reality, how are you protecting your wealth? Please comment below.

Copyright © 2013 by Mark Nestmann

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All governments – communist, capitalist, fascist, monarchy, theocracy, whatever – survive on the skim. They take money from productive people, by force or threat of force. However prettied-up or justified this fact may be, it remains the central fact of rulership.

It’s a simple but disturbing truth: A late-stage state’s modus operandi must always be “government against the people” – one that is inherently predatory. And it’s not because the participants are all sociopaths (though many are).

At most times, governments try very hard to skim quietly, as with payroll taxes, where the producer’s money is taken away before he or she ever holds it in their hands. That’s also why tariffs were a traditional tax – the average person never saw it, and didn’t feel violated.

But when governments are massively over-extended, they lose the luxury of the quiet skim and become more aggressive. This is simply what happens in long-established, monopolistic institutions, like governments: They spend wildly to make themselves look good, then find they need more money. Not willing to cut their spending, they have two choices:

1. Debasement of the currency, which they always do first. But, this trick never works for very long, since people do engage their minds when conducting commerce, and they adjust their prices to counteract the debasement.
2. Squeeze the producers dry, any way they can.

The Problem of Legitimacy

You may wonder why the governments don’t just cut their spending. That would seem an obvious choice. But they can’t cut spending without tarnishing their image as the mighty protector and the great font of human compassion. People pay taxes willingly because of this high and mighty image; lose the image and you lose tax compliance.

Think about it: the governments of the West portray themselves as the saviors of the weak, the healers of the sick, and the fixers of every problem. But if they stop paying off the poor, there will be riots, and the producers will get hurt. No longer being protected, they may no longer consent to having their money taken away from them day by day.

Governments function on legitimacy more than force. If they lose their legitimacy, they are done. Therefore they cannot cut spending.

The Philosophy of “Government against the People” at Work

Our Western civilization is at a late stage, just like Rome in the 5^th century, or Greece in the 3^rd and 4^th centuries BC, or like the Egyptians and Sumerians before them. The same basic suite of problems engulfs them all at these stages, but we will use Rome as example, since that is the closest to us in both time and temperament.

Take a look at the two graphs below.

This one shows the Roman debasement, which involved mixing cheap metals (such as lead) into their silver coins:

Now look at this one, showing the debasement of the dollar, which involved the creation of debt-based currency:

These are, essentially, the same chart, showing the same phenomenon.

What came next for Rome was the abuse of the producers.

Rome taxed in very different ways than modern governments, so I won’t take pages to describe it all, but I will give you a few highlights:

• The local elites who were charged with collecting taxes couldn’t keep up with Rome’s demands and started running away. Rome couldn’t find anyone willing to accept these very high positions, no matter how much prestige was attached.
• People adapted to avoid taxes and Rome passed new laws in response. (This helped create the serfdom of the middle ages.)
• People ran away to the Germanic and Frankish areas that surrounded Rome. To illustrate that fact, here’s a quote from a man named Salvian the Presbyter, from about 440 AD:

Thus, far and wide, they migrate either to the Goths or to the Bagaudae, or to other barbarians everywhere in power; yet they do not repent of having migrated. They prefer to live as freemen under an outward form of captivity, than as captives under the appearance of liberty. Therefore, the name of Roman citizens, at one time not only greatly valued, but dearly bought, is now repudiated and fled from, and it is almost considered not only base, but even deserving of abhorrence.

I could go on at length, but I think you get the picture. There were taxes on income, taxes on sales, arbitrary taxes, farm taxes, plain confiscations, and so on. If you had a friend close to the emperor you had a chance to be ignored, but if not, you were mercilessly bled dry. (And even a friend with the emperor’s ear might not help.)

Your Choices Now

I think it’s quite clear that we’re in the same civilizational stage as late Rome. When happens to us won’t be identical, but it will be similar. The one great advantage we have now is information. If we pay attention, we are able to see what is happening before it hits. We can also adapt to avoid most of the consequences. We may not like it that we have to adapt repetitively, but history doesn’t give us many options – late stage mega-institutions will behave like late-stage mega-institutions.

And in the short term, the “Government against the People” philosophy is not going to disappear. In fact, it’s likely to get much worse. Our choice is to get out of the way, or not.

(Editor’s Note. Paul Rosenberg is the “outside the Matrix” author of Freeman’s Perspective, a resource of practical insights on topics ranging from Internet privacy and economic freedom to personal development from a libertarian point of view. Receive our free updates and get a report that explains the “Government against the People” philosophy in more detail.)

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It seems to be ridiculously hard for a foreigner to obtain permanent legal residence in Peru, unless you marry a Peruvian. (Details to follow in another post.) But if you manage to overcome this hurdle, after a mere two years of full-time residence, you’ll be eligible for Peruvian nationality and passport.

The Peru passport isn’t a great travel document, because it provides visa-free travel to fewer than 80 countries. But it does facilitate travel within Central and South America.

In any event, on to today’s questions, and my take on them…

How Long Does it Take to Expatriate?

Dear Mark,

I’m a U.S.-Canada dual national interested in expatriating in Canada. I tried several times to contact the consulates here (in Canada) to schedule an expatriation appointment. All I got back was a long form letter informing me, with several variations, that expatriation wouldn’t free me from U.S. tax obligations. The letter actually invited me to make an appointment using the State Department’s automated appointment system. But there was no option to make an appointment to expatriate, although there was to—you guessed it—apply for, renew or add pages to my U.S. passport!

Then, I actually got a call back from one of the consulate I called! Right away, the lady that called tried to persuade me not to expatriate, and told me that I should keep my U.S. nationality. She told me that it takes two appointments about a month apart to expatriate.  They want you to “reflect” on your “irrevocable” decision for a month between appointments.

Is this reasonable? Or should I expatriate somewhere else?

Sincerely,

B.

Dear B.,

What BS!! Yes, many consular representatives will try to talk you out of expatriation, because they’re trained to toe the homelander line.

Try to avoid dealing with someone like this. Not only with this woman try to talk you out of expatriating, she may also demand additional documentation not legally required by State Department regulations, such as a letter explaining your motives. This is strictly optional although there are circumstances where it’s justified.

Since you’re a client, I can reveal that the consulate that I recommend for expatriation is [name of country deleted]. At this consulate, two visits are reported, but they only need to be one day apart. Also, the person in charge of the process at this consulate is completely non-confrontational.

Hope this helps–

Mark

(Note: The Nestmann Group, Ltd. offers expatriation consultations starting at just $1,300. Contact us for more information at info@nestmann.com.)

Reporting Obligations for Nevis LLC

Dear Mark,

I have an offshore LLC that I formed in 2012. My accountant is treating it as a Schedule C entity, and so it shows up on my 1040.

In 2012, the LLC purchased its first asset: some precious metals stored in a vault in Switzerland. The way I understand it, I don’t have to report the precious metals to the Treasury Department on Form 90-22.1 because I don’t personally own them.

Also, while of course, the IRS knows about the LLC, but how do they know what’s inside it?  The Schedule C only seems to show cash flow, but not assets.

Can you explain to me the LLC’s assets get reported to Uncle Sam?

Best regards,

S. __________

Dear S,

There are several different issues to consider in your Nevis LLC.

1. If your accountant is treating the LLC as a Schedule C entity, this is possible only after filing Form 8932, and electing it as a disregarded entity. The company that formed your LLC may have done this already but you should check your records to make sure. (By the way, we do this automatically for our clients so they’re always sure how the LLC will be taxed and reported.)

2. Whether the precious metals are reportable or not depends on the nature of the storage arrangement. If you don’t have exclusive and direct access to them (e.g., like in a safety deposit box), then I they’re probably reportable on Form 90-22.

3. If the arrangement is reportable, and if the LLC is a disregarded entity, both you personally AND the LLC itself must file the FBAR. Yes, this is crazy but it’s true.

4. The metals aren’t financial assets and thus need not be reported on the IRS’s new  Form 8938.

5. Your accountant also needs to file Form 8858 annually, which is the information return for a foreign disregarded entity (assuming it is a disregarded entity). This form will provide an abbreviated balance sheet for the LLC, and the metals will show up as an “other asset.”

Hope this helps. It is a bit complex.

Your accountant may find this link useful.

All the best,

Mark

(Note: The Nestmann Group, Ltd., working through its affiliate company Tarsus Corporate Services, Inc., can quickly and efficiently form an offshore IBC or LLC and advise on its optimum taxation for persons resident in the United States, Canada, and other countries. Contact us at info@nestmann.com for more information)

How to Turn Offshore Passive Income Into Employment Income

Dear Mark,

Recently you posted a blog entry on tax obligations and tax breaks for U.S. citizens and green card holders living abroad, here.

One of the tax breaks you mentioned was the “foreign earned income exclusion” (FEIE) which allows U.S. taxpayers living abroad to earn up to $97,600 annually tax-free (2013, adjusted annually for inflation).

That sounds like a great tax break, except that you also mentioned that the FEIE applies strictly to earned income, meaning wages, salary, self-employment income, tips, etc. It doesn’t let you exclude passive income, such as dividends, interest, capital gains, and so forth.

That leaves me out. I’m interested in moving offshore and living off my portfolio, which consists of a bit more than $3 million in passive assets.

Is there any way to exclude any of the earnings from this portfolio from U.S. tax?

Sincerely,

M. __________

Dear M. _________,

Surprisingly, you may be able to convert “unearned income” into “earned income” if you follow the IRS rules carefully.  Here’s what you need to do, step-by-step.

Step 1: Form a foreign corporation (such as an international business company or IBC).  Ordinarily, you wouldn’t want to form a foreign corporation to hold an investment portfolio, because of unfavorable tax consequences.  However, according to the IRS a salary you receive from a corporation is “earned income” if it represents a “reasonable allowance as compensation for work you do for the corporation.”  This raises the possibility of paying yourself “reasonable compensation” for portfolio management and related tasks relating to the corporation’s investments.

Step 2: Transfer the capital that you anticipate generating profits from to the foreign corporation.  You may need to report this transfer by filing IRS Form 926.

Step 3: Move abroad for a length of time sufficient to qualify for the FEIE (generally, at least one full year).

Step 4: Pay yourself a reasonable salary from the income the capital generates for the corporation.  The salary must be for services you (and your spouse, if applicable) provide to the corporation (e.g., portfolio management).  The corporation may also pay for your housing, fringe benefits, etc. All of this compensation may be excluded from U.S. taxation under the FEIE up to applicable limits.

Step 5: File IRS Form 2555 annually with your U.S. tax return to claim the FEIE (and foreign housing exemption/deduction, if applicable).  You won’t need to make Social Security or Medicare payments, as long as you’re living in a country that doesn’t have a social security totalization agreement with the United States.  The foreign corporation must file IRS Form 5471 each year. You (and possibly the corporation as well) must also file Treasury Form TD F 90-22.1 annually to report foreign “bank, securities, and ‘other’ financial” accounts.  You may also need to file Form 8938 with your tax return annually.

You must demonstrate that the salary the corporation pays for your services is similar to that you’d receive from an “arm’s length” employer.  For instance, you might be able to justify a higher salary if you are a certified portfolio manager, or the IRS classifies you as a “professional trader.”  But even if you’re not, you can still receive compensation for expending time and services to the corporation, although the “reasonable” salary you receive would likely be lower.

Your attorney should prepare a written agreement between you and the corporation documenting the services you provide.  You also need to keep detailed records to document performance of these services.  Finally, you’ll need to maintain whatever corporate formalities are required in whatever jurisdiction you form your offshore corporation.  

(Note: The Nestmann Group, Ltd. offers a package for this service for $6,000 that includes formation of a foreign entity, contracts drawn up, etc. for you to be paid a salary to manage a bona-fide offshore corporation, including one that holds your own personal assets. Contact us at info@nestmann.com for more information.)

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Let’s completely dispel a common misconception at the outset: that if you’re a U.S. citizen or resident (what the Tax Code calls a “U.S. person”) and reside permanently in another country, you don’t have to file or pay U.S. federal taxes. That’s untrue, and in fact, U.S. persons living abroad have the same and in some cases enhanced tax and reporting obligations in comparison to U.S. residents.

That’s not the whole story. There are a few tax breaks existing for U.S. persons living abroad, such as the Foreign Earned Income Exclusion, the Foreign Housing Exclusion or Deduction, and the Foreign Tax Credit. But there are also numerous foreign reporting requirements with which U.S. persons must comply, and their impact is especially magnified for those living abroad.

Foreign Earned Income Exclusion

The Internal Revenue Code contains an “escape clause” for U.S. persons living abroad that allows you to earn up to $97,600 annually tax-free (2013, adjusted annually for inflation). If you’re married and your U.S. spouse accompanies you overseas, you can double this exemption and jointly earn up to $195,200 annually, free of U.S. income tax.

To qualify for the FEIE, you must still file a tax return, along with an extra form (Form 2555) even if you earn less than the maximum FEIE threshold.

Another FEIE limitation is that applies strictly to earned income, meaning wages, salary, self-employment income, tips, etc. The FEIE doesn’t let you exclude passive income, such as dividends, interest, capital gains, and so forth.

An essential element in the FEIE is where you perform a service. You might qualify for the exclusion, but you must meet one of two requirements.

1)    You meet the “Bona Fide Residence Test” if you are a resident of a foreign country for an uninterrupted period that includes an entire “tax year” (generally, a calendar year). This qualification gives you greater freedom to return to the United States without jeopardizing the FEIE, but most filers don’t meet this requirement in their first year abroad.

2)    You meet the “Physical Presence Test” if you’re physically present in a foreign country or countries for 330 days in a 12-month period. The 12-month period does not have to be a calendar year, but you must count days traveling to and from the United States as U.S. days.

Foreign Housing Exclusion/Deduction

Another tax benefit for U.S. persons living abroad is the Foreign Housing Exclusion/Deduction. To qualify, you must again meet the Bona Fide Residence Test or the Physical Presence Test. If you’re a bona-fide employee working abroad, you may qualify for the exclusion, but self-employed U.S. citizens or green card holders can only receive a deduction. You apply the exclusion/deduction to earned income only, and the qualifying expenses are items such as rent, utilities, insurance, and the like.

To calculate how much income you can exclude or deduct, you must first calculate a number the IRS calls the “base housing amount.”  This is 30% of the maximum FEIE for the tax year, computed on a daily basis for the number of days in the qualifying period that fall within the tax year.  For instance, the maximum exclusion/deduction in 2013, where the FEIE was $97,600, would be $29,280. However, there is a higher limit in locations with a high cost of living, such as, say, Paris.

From this amount you must deduct something the IRS helpfully calls the “base housing amount.” For 2013, that number is $15,616, resulting in a “foreign housing cost amount” of $13,664.

Foreign Tax Credit

The Foreign Tax Credit (FTC) is a dollar-for-dollar credit against your U.S. income tax liability for income taxes paid while living or investing abroad. Unfortunately, U.S. persons living abroad can’t use the FTC for amounts excluded under the Foreign Earned Income Exclusion or the Foreign Housing Exclusion/Deduction.

On the plus side, though, you can carry back unused credits one year and or carry them forward 10 years. Also, if you live in a high-tax country such as Canada, the FTC can actually save you more in tax than the FEIE, but make sure you do the math before you choose one or the other.

Unfortunately, there are strict limits to the FTC. For instance, it doesn’t apply to social security taxes you pay in another country though some relief may be available if the country in which you reside has a Social Security “Totalization Agreement” with the United States. You’ll need a certificate of that coverage to qualify under such an agreement.

Foreign Reporting Obligations

U.S. persons, wherever they live, must report signature authority over, or financial interest in, foreign financial accounts, as well as report certain transactions and relationships with many types of foreign entities, including  foreign corporations, foreign partnerships, foreign disregarded entities, foreign trusts and offshore mutual funds, which  the IRS helpfully calls “Passive Foreign Investment Companies.”

Failure to comply with these reporting obligations can result in significant penalties. If you’re lucky, you might just get hit with a $500 “negligence” penalty, but in other cases, penalties start at $10,000 per failure to file, plus possible criminal sanctions. Also, don’t forget that there is no statute of limitations for failure to file any type of U.S. tax or reporting return.

Foreign Account Tax Compliance Act (FATCA)

Are we having fun yet? I certainly hope so, because I’ve saved the best (or worst, depending on your perspective) for last.

It’s called “FACTA,” and it became law on March 18th, 2010. FATCA creates a separate and overlapping reporting regime in addition to the one described in the previous section. It applies only to foreign financial assets, such as bank accounts, foreign securities, ownership interests in foreign entities and financial instruments or contracts with a foreign issuer or counterparty. The penalties for failing to comply with these requirements start at $10,000 per failure to file and as much as $50,000 if the failure continues after IRS notification. There’s a 40% penalty based on underpayment of tax attributable to unreported foreign assets.

Obviously, just because you live abroad in no way absolve you of your U.S. tax and reporting obligations., Given the current political climate “at home,” U.S. taxpayers living abroad can count on the government coming after each penny it feels it’s owed. The complexities of reporting while living abroad can be difficult to sort through, as exampled illustrated in this brief survey. Make sure you have a team of tax professionals in place to sort through the details and make sure the taxpayer is in compliance.

(The Nestmann Group, Ltd. and its strategic partners can assist U.S. persons living abroad to set up a plan to exclude earned income to the applicable maximum, and insure compliance with all U.S. tax and reporting obligations. Contact us at info@nestmann.com for more information.)

Copyright (c) 2013 by Mark Nestmann

The post Tax Obligations And Tax Breaks For U.S. Citizens & Residents Living Abroad appeared first on The Nestmann Group, Ltd..

Here’s how it works. Before we file your application for citizenship, we conduct an advance due diligence review. If the review is favorable and you proceed with your application for citizenship, we offer you an approval guarantee for an additional fee.

If after issuing the guarantee your application is rejected, we refund the advance due diligence fee, the approval guarantee fee, and all legal fees.

The cost of this service adds a minimum of $8,500 to the total cost of your application. This is a relatively small sum compared to the total cost of an application for St. Kitts & Nevis citizenship, which requires a minimum outlay around $280,000. We have also found that the process expedites processing of your application, although we cannot guarantee a faster decision by the government.

By way of background, St. Kitts & Nevis is an independent jurisdiction located in the eastern Caribbean. A former colony of Great Britain, it became an independent sovereign state in 1984.

To acquire St. Kitts & Nevis citizenship and a passport, there are two options:

•  Charitable donation option. This option requires a payment of $250,000 or more to the “Sugar Industry Diversification Foundation” (SIDF), an entity set up to benefit displaced sugar workers in the Federation.
• Real estate option. To apply for citizenship under this option, you must invest a minimum of $400,000 in qualifying real estate on St. Kitts or Nevis. Investments through your self-directed IRA or 401K qualify for this option.

In both cases, you make your investment or contribution only after the government has approved your application. Additional costs come to at least $28,000 for the SIDF option; more for the real estate option. No interview is necessary.

If you’d like more information on acquiring your own passport from the Federation of St. Kitts & Nevis, including our new “guaranteed approval” program, please contact me at info@nestmann.com, or call +1 (602) 604-1524.

Why consider a second passport at all? Click here to learn why a second nationality is one of the most important steps you can take to reduce your vulnerability to any one government.

Copyright © 2013 by Mark Nestmann

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